Financial Analysis of Toyota Essay
Executive Summary Toyota Motor Company (referred to as: Toyota) is one of the world’s top ten automotive companies. It was founded in 1933, and became the largest automobile company in Japan now. Toyota Motor was only a division of Toyota Automatic Loom Company, and later Toyota Motor Company was formally established in 1933. “In 1947, the company was a little-known domestic manufacturer producing about 100,000 vehicles a year. ” (P. C93) Toyota entered the United States in 1957, and now almost half of the production and sales of Toyota vehicles are in the U.
S. In 2008, Toyota surpassed General Motors (GM) as the largest car manufacturer.
It’s the first time for Toyota to become the world’s largest car manufacturers in the automotive industry. Since 2008 the financial crisis occurred, global economy influenced by the U. S. subprime mortgage crisis, Toyota’s profit earning shows a weak situation, and the profitability keeps going down. Through analysis, the owners, shareholders and supplies can get clearly financial information of Toyota, so that the leadership can make right decision.
This paper will be based on Toyota’s financial management and financial statement analysis, comparing the ratios and tends to figure out and solve the existing problems in the company.
Key Word: Financial Statement Analysis, Operating Efficiency, Ability to Repay, Profitability Financial Statement Analysis of Toyota I. Overall Analysis i. Assets and Liability Analysis From Table 1. 1, it is easy to figure out the total assets of Toyota in 2011 is lower than in 2010. It means the business scale of Toyota didn’t expand. One of the mean factors to lead this happened is the pressure of the stockholders. Since the current liabilities increased ?104, 776 from March 2010 to March 2011, but the total stockholders’ equity decreased ?10, 419.
The pressure of stockholders was obviously. Table 1. TOYOTA MOTOR CORPORATION CONSOLIDATED BALANCE SHEETS (¥) | Total Assets| Total Liabilities| Current Liabilities| Total Owners’ Equity| March 31,2010| 30,349,287| 19,418,844| 10,686,214| 10,930,443| March 31,2011| 29,818,166| 18,898,142| 10,790,990| 10,920,024| | | | | (¥1=$0. 013)| ii. Profitability Analysis From Table 1. 2, the net income from 2009 to 2011 was going straight up, meanwhile, net revenue was going down. The rest of the paper will make a further analysis of the operational capacity, ability to repay and profitability. To share resources and learn from each other can help Toyota becomes stronger.
Table 1. 2 TOYOTA MOTOR CORPORATION CONSOLIDATED STATEMENTS OF INCOME (¥) | Year 2009| Year 2010| Year 2011| Net Revenue| 20,529,570 | 18,950,973 | 18,993,688 | Costs and Expenses| (461,011)| 147,516 | 468,279 | Other Income (Expense)| (99,370)| 143,952 | 95,011 | Income (loss) before income taxes and equity in earnings of affiliated companies| (560,381)| 291,468 | 563,290 | Provision for Income Taxes| (56,442)| 92,664 | 312,821 | Equity in earning of affiliated companies| 42,724 | 45,408 | 215,016 | Net Income (Loss)| (461,215)| 244,212 | 465,485 |
Less: Net (income) loss attributable to the non-controlling interests| 24,278 | (34,756)| (57,302)| Net Income (loss) attributable to Toyota Motor Corporation| (436,937)| 209,456 | 408,183 | II. Analysis of Operating Efficiency Operating efficiency refers to the efficiency of the usage of assets by assets turnover. It shows the ability of the management and using the assets. The faster the assets turnover goes, the higher the efficiency of the assets using and the stronger the manage ability of the management.
Analysis of operating capacity can help to know the business conditions and management level, figure out the existing problem, strengthen enterprise management, rational use the assets and improve the financial situation. Analysis of operating capacity includes current assets turnover, fixed assets turnover and total asset turnover. Table 2. 1 TOYOTA MOTOR CORPORATION TABLE OF ASSET TURNOVER | Year 2010| Year 2011| Currant assets turnover| 1. 4496| 1. 6056 | Fixed assets turnover| 2. 8240 | 3. 0105 | Total assets turnover| 1. 2244 | 1. 1370 | Memo: Current assets turnover = Sales/ Current assets
Fixed assets turnover = Sales/ Fixed assets Total assets turnover = Sales/ Total assets From table 2. 1, it’s easy to figure out the total assets turnover decreased 8. 74%. Comparing and analyzing the total assets turnover can reflect the operational efficiency and changes for this year and last year, encourage enterprises to explore the potential ability, increase market shares, and improve assets utilization. In general, the high result reflects fast total assets turnover, the strong selling ability and high asset utilization. Between the year 2010 and 2011, Toyota has a higher efficiency in 2010.
The current assets turnover increased 15. 6% and fixed assets turnover increased 18. 65% from 2010 to 2011. The reason caused the increase of fixed assets turnover is the speed of fixed asset increase is lower than the speed of sales increase. It reflected the well managed during the two years, such as to reasonable arrange the using of fixed assets, thus it helped to increase the efficiency of the fixed assets and sales revenue. III. Analysis of Ability to Repay i. Analysis of Short-term Ability to Repay Ability to repay refers to the ability to repay maturing debt of companies.
Ability to repay includes short-term repayment capacity analysis and long-term repayment capacity analysis. Short-term repayment capacity analysis means companies use their current assets to pay for the current liability. It replies the ability of repaying the daily maturing debt and whether companies can repay the current liabilities on time. It’s an important indicator to reflect the financial situation of enterprises. Financial department has to pay attention to the short-term repayment capacity. Short-term repayment capacity is also an issue that companies’ creditors, investors and suppliers concern about.
To creditors, they have to know the ability to repay of companies, so that they can get the interest and principal on time. To investors, if it accrues problems on companies’ short-term repayment capacity, the management will focus on raising funds and accounts payable, and hard to concentrate on enterprise management, also the problems may increase the difficulty of raising funds. To Supplies, the problems on short-term repayment capacity may affect the accounts receivable. Therefore, the short-term repayment capacity is the important issue to concern of enterprises and related creditors, investors and upplies. Current ratio and cash ratio are two of the ratios that can measure the short-term repayment capacity. 1. Analysis of Current Ratio General speaking, the higher the current ratio, the stronger short-term repayment capacity and greater possibility to get repay of the current liabilities will be. In most situations, the normal current ratio will be 2:1. There are two issues need to note when using current ratio. First, there is different requirement of liquidity for different type of business, so in different enterprises the result of current ratio will be different.
It has to combine with the characteristics of different industries when using the current ratio to determine the companies’ ability of repay. Second, the high current ratio is not always the good thing. The reason causes excessive funds stay in the current assets might be cannot collect the account receivable or there are too many backlog funds. Table 3. 1 TOYOTA MOTOR CORPORATION CURRENT RATIO (¥) | Year 2010| Year 2011| Current Assets| 13,073,604 | 11,829,755 | Current Liabilities| 10,686,214 | 10,790,990 | Current Ratio| 1. 2234| 1. 0963| Memo: Current Ratio=Current Assets/ Current Liabilities
From the current ratio table above, it is easy to know the current ratio of Toyota between the year 2010 and 2011 doesn’t have a big difference, and the ratio in 2011 is lower than in 2010. Both of the ratios are lower than the normal ratio 2:1. It means the short-term repayment capacity is low, so there exists certain debt risk. 2. Analysis of Cash Ratio Cash ratio is one of the most important standards to measure the short-term repayment capacity. It can reflect the company’s ability of repaying current liabilities by calculating total assets in cash and cash equivalents and most liquid items in current liabilities.
It is also the most conservative one in liquidity ratios. Table 3. 2 TOYOTA MOTOR CORPORATION CASH RATIO (¥) | Year 2010| Year 2011| Cash and Cash Equivalents| 1,865,746 | 2,080,709 | Investments Funds| 2,256,275 | 3,571,187 | Current Liabilities| 10,686,214 | 10,790,990 | Cash Ratio| 0. 3857 | 0. 5238 | Memo: Cash Ratio= (Cash and Cash Equivalents + Investments Funds)/Current Liabilities It’s good news for Toyota that it has a higher cash ratio in 2011 than in 2010. In the other words, the short-term repayment capacity is raising. Actually, the cash ratio cannot tell the short-term repayment situation in a comprehensive way.
Auxiliary indices or current assets turnover conditions can show the liquidity of enterprises. ii. Analysis of Long-term Ability to Repay The result for analysis of long-term ability to repay is mainly to determine the ability of the repaying principal and paying interest. There are two aspects can be analysis. First is to analysis the ability of profitability. Under normal circumstances, enterprises cannot repay the debt by their assets, but they can repay the principal and interest by profit. Therefore, analysis of business profitability is an important aspect of analysis of long-term ability to repay.
The second is to analysis the structure of capital, or to compare the debt amounts and enterprise scale. If the proportion of debt is large, it means most of the operational risk will be charged by creditors. The larger the proportion of debt, the higher likelihood of the principal and interest insolvent will be. Asset-liability Ratio, equity Ratio and net Debt Ratio are the three of the standards to reflect the long-term ability to repay. 1. Analysis of Asset-liability Ratio Asset-liability ratio is the percentage of total liabilities divided by total assets.
It is also the relationship between total liabilities and total assets. The ratio can reflect the proportion of the debt financing, and also can measure the protection degree of creditor’s interest. From the standpoint of shareholders, when the capital profit margin is higher than loan interest rate, it will be better if the ratio is higher. Assets-liability ratio reflects companies’ comprehensive capacity of repay debt. The higher the ratio, the worse solvency is. Table 3. 3 TOYOTA MOTOR CORPORATION ASSET-LIABILITY RATIO (¥) | Year 2010| Year 2011| Total Liabilities| 19,418,844 | 18,898,142 |
Total Assets| 30,349,287 | 29,828,166 | Asset-Liability Ratio| 0. 6398 | 0. 6336 | Memo: Asset-Liability Ratio= Total Liabilities/ Total Assets The asset-liability ratio of Toyota is almost the same between 2010 and 2011, and it is going to be a little bit better in 2011. 2. Analysis of Equity Ratio Equity ratio reflects the relationship between the creditors and ownerships. Generally speaking, the financial structure will be more stable when invested capital from owners is larger than from creditors. In most situations, the solvency will be stronger when the equity is lower.
In shareholders’ viewpoint, when inflation exacerbate, they can shift risk to creditors by borrowing more money. When economic boom, enterprises can earn extra profit by borrowing money. When economic contraction, borrowing less money can help to decrease the interest and the financial risk. Low equity ratio is a low-risk and low-return financial structure. Equity ratio is one of the standard to measure long-term ability to repay. It is ration between total liabilities and total shareholders’ equity. Table 3. 4 TOYOTA MOTOR CORPORATION EQUITY RATIO (¥) | Year 2010| Year 2011|
Total Liabilities| 19,418,844 | 18,898,142 | Total Shareholders’ Equity| 10,930,443 | 10,920,024 | Equity Ratio| 1. 7766| 1. 7306| Memo: Equity Ratio= Total Liabilities/ Total Shareholders’ Equity Comparing the equity ratio between 2010 and 2011, Toyota’s financial status in 2011 is better than in 2010. IV. Analysis of Profitability i. Analysis of Profit Margin Ratio From Table 4. 1, it’s easy to see that the net income of Toyota was negative in 2009 and increased quickly in the following two years. The net income shows companies’ profit directly, so the business of Toyota was getting better.
On the other hand, the revenue shows decrease from 2009 to 2011. The reason coursed revenue decreased may be various, such as the competition in the industry, the financial crisis in the world so on. The profit margin in 2011 was almost the double in 2009, which was from -0. 0213 to 0. 0220. It means the speed of net income increase became faster than the revenue increase. Table 4. 1 TOYOTA MOTOR CORPORATION PROFIT MARGIN RATIO (¥) | Year 2009| Year 2010| Year 2011| Net Income| (436,937)| 209,456| 408,183| Revenue| 20,529,570| 18,803,457| 18,525,409| Profit Margin Ratio| -0. 0213| 0. 111| 0. 0220| Memo: Profit Margin Ratio=Net Income/ Revenue ii. Analysis of Gross Profit Ratio As mentioned, the revenue between 2009 and 2011 was going down, but from Table 4. 2 people can find the cost of goods sold is decreased too. As a result, the gross profit margin went down. Gross profit margin shows how fast the gross profit increase over revenue or how slow the gross profit decrease over revenue. The table shows the speed of gross profit decrease was slower than the revenue decrease. Although it wasn’t a very bad new, companies want to see is the increase of gross profit.
Since the gross profit margin is very close to 0, it means the cost of goods sold is too high for Toyota. Table 4. 2 TOYOTA MOTOR CORPORATION GROSS PROFIT RATIO (¥) | Year 2009| Year 2010| Year 2011| Revenue| 20,529,570 | 18,803,457 | 18,525,409 | COGS| 17,468,416 | 15,971,496 | 15,985,783 | Gross Profit Margin| 0. 1752| 0. 1773| 0. 1589| Memo: Gross Profit Ratio= (Revenue- COGS)/ Revenue V. Existing Problems and Suggestion According to the previous analysis, the revenue of Toyota was decreasing from 2009 to 2011, and the cost of goods sold was too high.
These two problems made a bad influence of Toyota’s future development. In order to avoid the hidden danger, Toyota can make some adjustment below: i. Improve the Structure of Capital To improve the relationship with banks in order to get long-term loans and try to get some more support form supplies so that to can make a better repayment plan. Using the short-term loans to improve financial ability. ii. Reduce the Cost and Increase the Profit Although the cost of goods sold was decrease from 2009 to 2011, comparing with the revenue, the gross profit margin was to low.
Toyota needs to strengthen the inter-company management in order to save more cost. For example, to improve the utilization of raw materials, so that to help the company to increase gross profit. iii. Promote the Cooperation in Auto Industries Since the competition of the industries keeps increasing, what Toyota can do is not only using their technical improvement but also increase the cooperation with other companies in the industries. To share resources and learn from each other can help Toyota becomes stronger. Reference Jones, Gareth R. “The Global Auto Industry. Theory of Strategic Management. 9th ed. [Mason, Ohio U. a. ]: South-Western, Cengage Learning, 2010. C81-92. Print. Jones, Gareth R. “Toyota in 2009. ” Theory of Strategic Management. 9th ed. [Mason, Ohio U. a. ]: South-Western, Cengage Learning, 2010. C93-105. Print. “Annual Report. ” U. S. Securities and Exchange Commission (Home Page). UNITED STATES SECURITIES AND EXCHANGE COMMISSION. Web. 24 Nov. 2011. <http://www. sec. gov/Archives/edgar/data/1094517/000119312511172686/d20f. htm>. Investopedia. com – Your Source For Investing Education. Web. 24 Nov. 2011. <http://www. investopedia. com/>.